CAA CAA Financial Management & Ethics 1 — Questions and Answers
Question 1: Which financial ratio measures a company's ability to meet short-term obligations using its most liquid assets?
- Current ratio
- Quick ratio (Correct answer)
- Debt-to-equity ratio
- Return on assets
Correct answer: Quick ratio
The quick ratio (acid-test ratio) excludes inventory from current assets, providing a stricter liquidity measure than the current ratio.
Question 2: Under the AICPA Code of Professional Conduct, which principle requires a CPA to be straightforward and honest in professional relationships?
- Objectivity
- Integrity (Correct answer)
- Due care
- Confidentiality
Correct answer: Integrity
The integrity principle requires CPAs to be honest, candid, and free from deception in all professional and business relationships.
Question 3: The weighted average cost of capital (WACC) is best described as:
- The cost of equity financing only
- The average return required by all of a company's capital providers, weighted by their proportions (Correct answer)
- The interest rate on long-term debt
- The risk-free rate plus a market premium
Correct answer: The average return required by all of a company's capital providers, weighted by their proportions
WACC blends the cost of equity and cost of debt (after tax) weighted by their respective proportions in the capital structure.
Question 4: Which capital budgeting method calculates the discount rate at which the net present value of a project equals zero?
- Payback period
- Accounting rate of return
- Internal rate of return (IRR) (Correct answer)
- Net present value (NPV)
Correct answer: Internal rate of return (IRR)
IRR is the discount rate that makes the NPV of all cash flows from a project equal to zero.
Question 5: A certified accounting analyst discovers a material misstatement in financial statements that management refuses to correct. What is the most appropriate next step?
- Ignore the issue to maintain client relations
- Issue an unmodified audit opinion
- Escalate to those charged with governance (e.g., audit committee) (Correct answer)
- Immediately resign without further action
Correct answer: Escalate to those charged with governance (e.g., audit committee)
Professional standards require escalating unresolved material misstatements to those charged with governance before considering resignation.
Question 6: Which of the following is an example of an operating activity in the cash flow statement under US GAAP?
- Issuance of common stock
- Purchase of equipment
- Cash received from customers (Correct answer)
- Payment of dividends
Correct answer: Cash received from customers
Cash received from customers is a primary operating activity because it relates directly to the company's core revenue-generating operations.
CAA CAA Financial Management & Ethics 1
Which financial ratio measures a company's ability to meet short-term obligations using its most liquid assets?